THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

BRIANNA KEILAR, CNN ANCHOR: Hi, I'm Brianna Keilar and here's what's making news now. Secretary of State Condoleezza Rice is holding crisis talks with Israel's leader. She returned to the Middle East today, just four days after her last visit. Going in Rice predicted the talks to end the Israeli/Hezbollah conflict would be difficult and emotional. Meanwhile Israel and Hezbollah traded fire for an 18th day. Lebanese sources say an Israeli attack today shut down the main border crossing between Lebanon and Syria, and in Southern Lebanon the U.N. says an Israeli air strike wounded two of its peace keepers today.

Israel says more than three dozen Hezbollah rockets hit its soil today. Hezbollah's leader appearing on television today, threatening to strike deeper in to central Israel.

Meanwhile a Muslim-American man from Washington State now charges in what authorities are calling a hate crime. He's accused of killing one person and wounding five others in a shooting spree at a Jewish center in downtown Seattle.

California getting a break from a deadly heat wave. No triple digit temperatures are in the forcast this weekend, but the sizzling weather is moving east. Heat adviseries are now in place from the Plains to the North East. In California at least 141 deaths are blamed on the heat wave.

And a tremendous explosion lights up the Las Vegas sky line over night. Fire fighters there say lightening hit a propane plant and then tank after tank errupted, domino style, in these thunderous blasts. And here's the amazing part, our affiliate KBBC says apparently nobody was hurt.

Reckless driving charges in Connecticut. The 85 year old man who plowed his station wagon in to a crowd will go to court in a few days. The incident happened at a sailing festival earlier this month. The driver claims his gas pedal got stuck. Twenty eight people were hurt.

And if you make minimum wage, you may be a step closer to getting a raise. The House has approved a hike in the minimum wage from $5.15 to $7.25 an hour over a three year span, but there's a big hurdle ahead, the House bill includes cuts in the Estate Tax and Democrats, who oppose those cuts, could help kill the measure when the Senate takes it up next week.

Coming up at the top of the next hour a live report from CNN's John King in Jerusalem. He will have the very latest on Secretary of State Condoleezza Rice's return to the region.

I'm Brianna Keilar at CNN Center in Atlanta. More news at the bottom of the hour. CNN PRESENTS begins right now.

(BEGIN VIDEOTAPE)

ROBIN WRIGHT, WASHINGTON POST CORRESPONDENT: Hezbollah is the first army in the Arab world ever to force the Israelis to retreat.

MARK PERRY, HEZBOLLAH EXPERT: They have evolved from a very small guerilla organization to a very professional army.

UNIDENTIFIED MALE: Hezbollah is doing all the things for the people.

SKEIK HASSAN NASRALLAH, HEZBOLLAH LEADER: We are not a terrorist movement.

Tonight, "Inside Hezbollah, The Party of God." Freedom fighters to some in the Muslim world, terrorists to the U.S. and Israel. 25 years ago, few had ever heard of Hezbollah, now, it's one of the most powerful groups in the region. Its war against Israel has already claimed hundreds of lives.

Tonight, over the next hour, we'll take you inside Hezbollah, a revealing look at its tactics, its leaders, and its impact, not only on Israel, but on the U.S., and the entire Middle East.

A relentless barrage of missiles, casualties on both sides. The escalating battle between Israel and Hezbollah is decades old.

Hezbollah was founded in 1982 in response to the Israeli invasion of Lebanon. It seeks the destruction of Israel and with an AK-47 emblazoned on its trademark yellow flag, attacks in the name of Islam. The word "Hezbollah" means "Party of God."

Most Americans first became aware of Hezbollah on October 23rd, 1983,. A truck, packed with explosives, detonated outside the marine barracks in Beirut.

WRIGHT: It was the largest non-nuclear explosion anywhere on earth since world war II. It was the largest loss of American military life in a single incident since Iwo Jima.

COOPER: Two-hundred-and-forty-one American servicemen and women were killed. The force, the explosion, reduced the building to rubble. Many of the victims, marines sent to Beirut to keep peace between Israel and various factions in Lebanon. The attack was Hezbollah's calling card of terror, delivered to America by a suicide bomber. Over the years, there would be many more.

Kidnappings. In 1985, journalist Terry Anderson was seized. In 1987, they took church envoy Terry Waite.

TERRY WATIE, FMR HEZBOLLAH HOSTAGE: They suspected, wrongly, that I was involved in what became known as the Iran-contra affair, and I was able to convince them that I was a humanitarian negotiator, and I came out with my life.

COOPER: Both men were eventually released. Others, however, never were.

Hezbollah is a suspect in the torture and murder of U.S. Colonel William Higgins. Higgins disappeared in 1988, while leading a U.N. observer group in south Lebanon. A year and a half later, this video appeared on television screens around the world. Higgins, badly beaten body, hanging from a rope.

There have been other suicide attacks, most notably in June of 1996, when 19 U.S. airmen were killed in an explosion that ripped through the Cobar towers in Saudi Arabia.

A U.S. and Israeli estimates Hezbollah is responsible for more than 200 terror attacks, attacks that have killed more than 800 people since 1980. That's why the U.S. calls Hezbollah a terror group, but in Lebanon, to many it is much more than just that.

PERRY: They're quite a deeply community-oriented organization that is primarily a social organization first, and a militant organization second.

COOPER: Inside Lebanon, Hezbollah has a television network with millions of viewers. It's also a political party that's gaining strength in Lebanon's parliament. Hezbollah has its own hospitals, its own schools and charities. It's a lifeline for Shias living in Beirut's impoverished suburbs and throughout southern Lebanon.

PERRY: They provide birth to death insurance for their members and for their community. They remind me of kind of a ward organization, a precinct organization in Chicago. They know where everyone lives, they know what the problems are. They have social service workers and they know their people very well.

COOPER: Maybe true, but to Israel and America, Hezbollah is first and foremost a threat.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES OF AMERICA: It's this provocation of Hezbollah that has created this crisis, and that's the root cause of the problem.

COOPER: Israelis, like Ron Kierman, live on the northern border in constant fear.

RON KIERMAN, ISRAELI CITIZEN: It's definitely people are afraid and I think that fear is one of the things that keeps us alive.

COOPER: Kierman has experienced terror firsthand. His daughter, the victim of a suicide bomber.

He believes Israel's military might is more than justified against Hezbollah.

KIERMAN: I have to emphasize that Hezbollah is an extension of the Iranians and the Irani president said, not once, and not twice, he does not want us here, period. That's it. He wants to eliminate me.

COOPER: Experts say Hezbollah now has cells around the world, including inside the United States. But most of its support: cache, rockets, training, comes from its neighbors to the east, Syria and Iran. WRIGHT: Iran remains the kind of sponsor of Hezbollah. It is the primary source of arms. It is reported to provide about $100 million a year in arms goods and cache.

Syria's role is one of facilitator. It is the logistical link between Tehran and Beirut.

COOPER: That financial backing has helped Hezbollah evolve into a formidable force in the region, one capable of waging war.

So what does Hezbollah want now?

HISHAM MELHEM, AN-NAHAR NEWSPAPER CORRESPONDENT: They want to play an important role. They want the state to invest in infrastructure in Shia areas, and they want their place under the sun in Lebanon. But definitely they don't want to disarm.

COOPER: Destroying Hezbollah is Israel's top priority.

UNIDENTIFIED MALE: We shall hunt down every single terrorist who is threatening Israel.

COOPER: CNN's military analyst General David Grange was involved in counterterrorism activities in the region in the early 1980s.

GEN. DAVID GRANGE (RET), CNN MILITARY ANALYST: I think if there's going to be a global war on terrorism, it has to be disarmed. The question is who's going to do it? Who is going to have the guts to do it? I think we should be thankful, whether you like Israel or not, that Israel is taking them on.

COOPER: And taking them on with a vengeance.

HIRSCH: We cannot live under this umbrella of terror of missiles, and we will attack and attack, and fight for our lives.

COOPER: Born of war, Hezbollah now is, once again, at war with Israel -- innocent victims suffering on both sides of the conflict.

Israel says they hope to destroy the military capabilities of Hezbollah. But can they? And what happens to Hezbollah if they do? I talked about that earlier with CNN's chief international correspondent Christiane Amanpour, who is with the Israeli military along the border.

CHRISTIANE AMANPOUR, CNN CHIEF INTERNATIONAL CORRESPONDENT: Israel wants to weaken it, wants to destroy its military ability, wants to make sure that it never again sits on the border, and is able, at will, to fire into parts of northern Israel.

COOPER: But if it is broken militarily, if they don't have the capabilities of launching missiles, of launching military operations on their own, what happens to Hezbollah politically within Lebanon?

AMANPOUR: Well, they're hoping that the Lebanese government can eventually, and it'll take time, assert itself as the national and sovereign state and army, and that Hezbollah, which already had moved very, very fast and rapidly from just being a military organization to politics, will continue in the political vein.

COOPER: It's also said to receive large amounts of money from Iran, likely Syria as well. What happens to the support from Iran, and from Syria, if militarily Hezbollah gets broken?

AMANPOUR: Hezbollah is not considered a puppet, but people are very concerned that Iran and Syria are able to use it as their proxy for the kind of destabilizing operations that it has been able to conduct. So, many people in the region, we're told, would perhaps like to see a weakening of its military capability.

COOPER: With the Israeli operation going on right now, does Israel run the risk of emboldening support for Hezbollah, of giving Hezbollah new recruits?

AMANPOUR: The killing of these people can turn them into more fervent devotees. On the other hand, there is a considerable number of people who believe that they overreacted, that they overplayed their hand, Hezbollah, and that they have brought this incredible rain of destruction on Lebanon, the incredible mounting death toll in Lebanon, the smashing of so much of what has been built anew in Lebanon, and there are many, not just in Lebanon but around the region, who are very, very upset about that.

COOPER: Christiane, thanks.

Next, Hezbollah, the tactics of terror.

(COMMERCIAL BREAK)

COOPER: No place is safe in Haifa these days. A northern city well within reach of Hezbollah's rockets, Haifa is the newest target of terror. And no one is more familiar with the reality of that terror that Ashed Gall (ph).

ASHED GALL, BOMB EXPERT, HAIFA POLICE: It's very hard, it's very hard, difficult to see direct heat on a house and somebody's life.

COOPER: A bomb expert with the Haifa police, Gall looks for clues in the rocket remnants in order to better understand what Hezbollah has in its arsenal. Coincidentally the first rocket to hit Haifa landed in Gall's neighborhood.

GALL: It was surprising, and shocking, and nobody expected it.

COOPER: Though Gall considers these to be crude weapons, he admits that Hezbollah rockets can now reach further than ever before.

GALL: What you can see is only the remain of the rocket engine, because the rest exploded.

This is 122 millimeter rocket. This was the first one who was falling in Stella Maris (ph), near my house. Nobody injured in that incident. This one, we knew that they had, but we didn't believe they would send them so soon.

COOPER: Israeli experts fear that Hezbollah has even longer range rockets that can strike deep near Israel's heartland, even Tel Aviv.

GALL: This is the first one that hit.

COOPER: Haifa's train depot was the scene of the city's deadliest rocket attack.

GALL: The rocket hit the roof, explode there. And then it spread.

And then the rocket engine hits the floor here. It was in the morning, and it caught them by surprise. People were working here to fix the trains.

COOPER: Two days later, the depot was hit again.

GALL: It's surprising, because it's very rare. Because you can't control the rocket, and they hit the same place.

COOPER: Hezbollah has long relied on short-range Katyusha rockets to strike at the cities and towns along Israel's northern border, but Israel was caught off guard when Hezbollah aimed a guided missile and hit an Israeli warship on July 14th. Daniel Benjamin was the National Security Council Counterterrorism Director in the Clinton administration.

DANIEL BENJAMIN, SENIOR FELLOW, CENTER FOR STRATEGIC AND INTERATIONAL STUDIES: Certainly Hezbollah has never severely damaged an Israeli warship at sea. So, they're using much more sophisticated armaments than they were before.

COOPER: Hezbollah's missile capability is an indication of how advanced it's become, and how much support it's getting from Syria and Iran.

PERRY: They're about the fourth or fifth strongest military in the Middle East.

COOPER: Mark Perry is director of an organization that encourages dialogue with Hezbollah.

PERRY: They have evolved from a very small guerilla organization to a very professional army, that has brigades in the field with officers, know what they're doing. They're in constant training. This is a highly professional army.

COOPER: Retired General David Grange say special forces veteran who operated in Lebanon.

GRANGE: They've taken out some conventional warfare strength. I mean, the ability to have a rocketry force to fire missiles with better precision than they used to with the Katyusha rockets, which they just point south and fire. Now they're a little more accurate.

And I think they have some more conventional capability than they used to have than just terrorist attacks, suicide bombers.

COOPER: Since its early days, Hezbollah's greatest weapon has been terror.

Though Hezbollah no longer uses suicide bombings, the group that pioneered the tactic has inspired Islamic Jihadists throughout the world to strap on bombs and kill. Abdullah Tif (ph) Abdullah is one of many in south Lebanon who support Hezbollah.

ABDULLAH: There is nothing more human than a human who would wrap himself with bombs, because this is the only way. There is no planes, there is no tank, there is nothing. You have nothing. You have bare hands.

COOPER: Kidnapping is another tactic Hezbollah has used effectively against Israel.

Gary Bernson (ph) is a former CIA field commander in Afghanistan.

GARY BERNSON, FROMER CIA FIELD COMMANDER: You may recall the airman Lieutenant Colonel Ron Arad. He was captured by the Lebanese, and he was turned over to Hezbollah and the Iranians. They tortured Ron Arad to death; the Israelis never recovered him. COOPER: Kidnapping Israeli forces has proven valuable, often resulting in prisoner swaps.

In 1985 Israel released more than 1,000 Arab prisoners in exchange for three Israeli soldiers who had been captured in Lebanon. The abduction of two Israeli soldiers near the Lebanese border July 12th set off the current conflict.

UNIDENTIFIED MALE: OK, OK, we have a siren now.

COOPER: But as always, Hezbollah's most effective weapon is fear.

In Haifa, the constant sirens signal a new and even more unsettling threat.

UNIDENTIFIED MALE: It's different. It's not a suicide bomber on the bus. It's something that's going to fall from the sky and it's very fatal. People are afraid.

COOPER: Up next, the face of Hezbollah. The charismatic cleric who leads the organization, Hassan Nasrallah, in his own words.

(COMMERCIAL BREAK)

COOPER: May of 2000. The Shias of south Lebanon erupt in joy after Israel pulls out, ending an occupation that lasted more than 20 years. Hezbollah and its supporters proclaim victory. Look closely at the celebratory poster on this car. You'll see the man behind Hezbollah's armed campaign. Their leader, sheikh Hassan Nasrallah, who just this week, reminded the world of how determined they are.

SKEIK HASSAN NASRALLAH, HEZBOLLAH LEADER: In 2000, we in Lebanon, we with modest capabilities and efforts, and with a small number of mujahideen, with few supplies and little equipment, presented a model of how resistance can overcome an occupation army.

COOPER: But Hezbollah terms its armed resistance, guerilla and terror tactics, eventually wore the Israelis down.

WRIGHT: Hezbollah is the first army in the Arab world ever to force the Israelis to retreat. It managed to do what hundreds of thousands of conventional military troops in Egypt, in Jordan, in Syria were unable to do for more than half a century.

COOPER: And that gave Hezbollah an almost mythical stat news Lebanon, elevating its leader, Hassan Nasrallah, into one of the more revered leaders in many parts of the Muslim world.

Now as Israeli air strikes bombard Hezbollah strongholds, Nasrallah's renown is once again celebrated on the Arab street.

Like here in the Syrian market, where a shopkeeper gives away pictures of his hero.

UNIDENTIFIED MALE: Nasrallah's popularity is bigger than the mountain and higher than the sky. He is now getting supplies from god and from the people.

COOPER: But whether in Nasrallah's support has staying power in a religiously divided Lebanon is questionable.

WRIGHT: There will be many in Lebanon who will be very upset about the fact that Hezbollah's cross-border raid brought about this extraordinary military response from Israel, and will hold Hezbollah accountable as well as Israel.

COOPER: The Hezbollah leader may well be relishing this moment, one he's long prepared for. At the age of 10, as the story goes, Nasrallah played cleric, wrapping his head in his grandmother's black scarf, telling others to pray behind him.

By the age of 15, he'd entered a Shia seminary in Iraq. Now, 46, the black head scarf is his signature, and he's much more than just a cleric.

WRIGHT: He is both the charismatic, Islamic populist, and the wily guerilla tactician.

Kind of a cross between Ayatollah Khomeinei, Iran's revolutionary leader, and Che Guevara, the Latin-American revolutionary.

COOPER: Though he's considered a formidable player in Lebanon, Nasrallah claims he does not inspire to be another Osama, condemning the 9/11 attacks on the world trade center.

WRIGHT: One of the ironies about Hezbollah is that many in the West just lump them in the same basket as Osama bin Laden and Al Qaeda. But, actually, there's an enormous amount of tension between two very different movements.

UNIDENTIFIED MALE: We are now the most dangerous place at the most dangerous moment.

COOPER: CNN's Nic Robertson takes us inside a Hezbollah stronghold.

(COMMERCIAL BREAK) KEILAR: I'm Briann Keilar and here's what's making news now. Israel and Hezbollah traded fire for an 18th day. The U.N. says an Israeli air strike wounded two of its peace keepers in Southern Lebanon today and an Israeli attack shut the main border crossing between Lebanon and Syria. Israel says more than three dozen Hezbollah rockets hit its soil today. Hezbollah's leader appeared on television also today, threatening to strike deaper into central Israel.

And this picture just in. Secretary of State Condoleezza Rice is in crisis talks with Israel's Prime Minister Ehud Olmert. She returned to the Middle East today, predicting negotiations will be emotional and difficult. There's no word yet on when she might travel to Beirut to meet with Lebanon's prime minister.

And a new move to stop Iran's nuclear program. A draft U.N. resolution would give Iran until August 31st to stop enriching and reprocessing Uranium, or face possible sanctions. The resolution was unveiled yesterday. The Security Council could vote as early as Monday.

Meanwhile police are calling it a hate crime. A Muslim man opened fire at a Jewish center in Seatlle, killing on woman and wounding five others. The 31-year-old suspect is behind bars.

And welcome relief for California. Forecasters say the stalled high pressure system responsible for the two week old heat wave is finally moving eastward. That's allowing cooler Pacific jet stream air to move in, bringing an end to the triple digits.

And coming up at the top of the hour, a new live report from CNN's John King in Jerusalem. He'll have the latest on Secretary of State Condoleezza Rice's return to the region.

I'm Brianna Keilar at CNN Center in Atlanta. Now back to CNN PRESENTS.

(BEGIN VIDEOTAPE)

COOPER: Hezbollah has grown into a major military, political and social force here in Lebanon. To truly understand their power, however, you have to venture into the war-torn Shi'a neighborhoods of southern Beirut where Hezbollah leaders are considered heroes. CNN's senior international correspondent Nic Robertson takes us inside.

NIC ROBERTSON, CNN CORRESPONDENT: Where are we going now?

UNIDENTIFIED MALE: Now, we are moving to where Israeli jet fighters, bombed what it calls Hezbollah headquarters.

ROBERTSON (voice-over): These are Beirut's southern suburbs, predominantly Shiite and a Hezbollah stronghold. These days, it's a dangerous place, and this Hezbollah spokesman is clearly rattled by the prospect of more Israeli bombs.

(on camera): How dangerous is it in this area at the moment? UNIDENTIFIED MALE: It is very, very dangerous. We are now the most dangerous place in the most dangerous moment.

ROBERTSON (voice-over): Israeli warplanes have hit this area hard, because it's the political capital of Hezbollah. A state within a state. Its influence is everywhere. Before the bombing began, you could find Hezbollah hospitals, schools and charities, supporting Lebanon's traditionally poor and dispossessed Shiite community.

UNIDENTIFIED FEMALE: I said to Hezbollah, God bless you.

ROBERTSON: For Malika Saror (ph) and her family, Hezbollah provides water when no one else can or will. Even now, when so many are displaced.

UNIDENTIFIED FEMALE: My sister, we heard her, go to bring water from there, there is very big cans. They put water in it, in all Lebanon. ROBERTSON: In her old neighborhood near Beirut's airport, the one she fled after Israel began bombing, and the one she hopes to return to, Hezbollah picked up the garbage, paid for medical care, and helped run the schools. Stepping in, and overshadowing the Lebanese government.

UNIDENTIFIED FEMALE: Hezbollah is doing all the things for the people.

ROBERTSON: On a practical level, Hezbollah paid half the cost for her daughter Zeneb's (ph) school and Zeneb says that was just the beginning of the help.

UNIDENTIFIED FEMALE: If something is broken in my school, Hezbollah helps them to make it, and to correct it again.

ROBERTSON: Now, Zeneb is on her way to becoming the next generation of Hezbollah.

UNIDENTIFIED FEMALE: I hope that, to when I be big and adult, I want to be a doctor for Hezbollah. If someone has a hurt in his arms, I will help him.

ROBERTSON: Both mother and daughter say they appreciate all that Hezbollah does for them, but the most important thing to them is still the resistance.

UNIDENTIFIED FEMALE: I like them more when they kill the Israelis from our land, because this land is our, us only.

UNIDENTIFIED FEMALE: All my life, all my life to family, to-my family and to my husband, to my sisters, to all the world.

ROBERTSON: And in return, for all that, it's given her, Hezbollah's won Malika's (ph) unconditional support. When the family is finally able to return to their home, they believe that Hezbollah will help them rebuild.

UNIDENTIFIED FEMALE: They promised that they will help the people to continue, yes, their life again.

ROBERTSON: Hezbollah has a track record of doing just that. In 1996, after an Israeli military assault destroyed numerous buildings in southern Lebanon, Hezbollah was quick to help its supporters rebuild.

TIMUR GOKSEL, FORMER UN PEACEKEEPER: Hezbollah has a very interesting outfit called the Jihad Construction company. They load their trucks with windows and all kinds of construction equipment, and all of these young guys with their t-shirts saying jihad, they will go from house to house and offer the people, do you want us to fix the windows, do you want us to fix your doors?

ROBERTSON: Even now, as its buildings are being destroyed, Hezbollah is organizing refugees and relief services, proof, its ability to provide social service, has survived. (on camera): There's a lot of damage here.

(voice-over): The rebuilding of south Beirut won't come until the bombs stop falling, but when it does, Hezbollah will be there for its followers, as it has so many times before. For now, it's more about surviving.

COOPER (voice-over): Next -- Israel's growing fear, why this conflict is different than all others.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

COOPER: For Ron Kierman (ph) in Haifa.

UNIDENTIFIED MALE: This is my car (ph).

COOPER: Air raid sirens and rocket explosions are a haunting remind per.

UNIDENTIFIED MALE: This is the very spot where I lost my daughter together with other 16 people.

COOPER: Three years ago, Kierman's 17-year-old daughter, Cal (ph) was on this bus in Haifa when it was blown apart by a Palestinian suicide bomber. A young girl killed on her way to pick up her prom dress, unspeakable pain for her father, who tried desperately to reach his daughter the day of the bombing.

UNIDENTIFIED MALE: I kept dialing with the speed dial, number four, number four. She didn't answer, and then you don't want to realize, even today, 40 months after that, I don't want to realize that she's not with us.

COOPER: Now, with Hezbollah rockets reaching further inside Israel than ever before, the fear of terror is a daily part of his life.

UNIDENTIFIED MALE: Right now, we don't know where the missiles are going to hit. It can hit anyone in his cottage. Much more range than the suicide bomber did. People are afraid, and we have to be tuned to the radio or to the noises outside.

COOPER: The threat of Islamic terror is a fact of life in Israel. Palestinian militant groups like Hamas have turned the country into a breeding ground for suicide bombings and terrorism. This chilling footage shot by Hamas shows an actual suicide bombing.

UNIDENTIFIED MALE (through translator): It took four months to dig a tunnel under an Israeli military post.

COOPER: December, 2004, two Hamas bombers prepare for a new kind of suicide mission.

UNIDENTIFIED MALE (through translator): We are fighting you with a method that you haven't seen before. We will come to you from underground.

COOPER: They've tunneled their way under an Israeli army outpost, getting ready to blow up 1.5 tons of explosives. Fifteen Israelis are killed in the explosion. This footage shows just how dedicated these groups are to their cause. Retired lieutenant general Moshe Yaalon served as chief of staff of the Israeli military from 2002 to 2005.

MOSHE YAALON, FORMER ISRAELI CHIEF OF STAFF: They sanctify death. They do not sanctify life. This is the way they educate their people.

This is part of the work in their system (ph) and the production line, unfortunately, in the schools or in the kindergarten. Actually educate the young generation, this is the case of Hezbollah, Israelis, Palestinian tourists (ph), they educate the young generation to become homicide bombers.

COOPER: Most Israelis have learned to exist with the constant threat of terror, but now cities and towns once untouched by violence have been pounded by Hezbollah rockets. Israeli citizens are experiencing combat in a way they've rarely known. In the northern city of Tiberias, a town once safe from Hezbollah's reach, Yuval Liani surveys the damage caused by a rocket.

COOPER: The force of the blast shattered windows in Yuval's daughter's bedroom, in an ironic twist the timing of the explosion actually saved her life. The rocket hit on a Saturday. She was in a synagogue with her family.

UNIDENTIFIED FEMALE (through translator): This time I wasn't here. But what if I'll be here next time and it hits me? I'm very scared.

COOPER: But in towns like Qiryat Yam to the northwest of Tiberias, many Israelis have simply left. With a constant barrage of Hezbollah rockets, residents who remain have taken refuge at this massive bomb shelter liker this where they're holed up like victims of a hurricane.

UNIDENTIFIED FEMALE (through translator): There isn't enough food here. The kids are frightened. It's not quiet here. All the time there's noise and yelling.

COOPER: No longer allowed to play on the street, children pass the time now indoors.

UNIDENTIFIED MALE: They throw bombs, rockets and Katyushas at us and shoot at us, too. They stole a few soldiers from our army.

COOPER: Karnit Goldwasser she fears for her husband, Udi, and Israeli soldier abducted near the border near Hezbollah. The two were newlyweds, married just 10 months ago. So far she's had no information about her husband's condition.

KARNIT GOLDWASSER, HUSBAND HELD HOSTAGE: He is the love of my life. We wanted to be married and we chose to have family, children, and so much I want to see and not only to dream.

COOPER: Seven miles from the Lebanese border in Nahariya, the family anxiously awaits word on Udi's fate. After a series of Hezbollah rocket attacks, the city has become a virtual ghost town. Residents have fled or now stay indoors.

GOLDWASSER: We're suffering here in the heart because we're waiting for Udi, we are waiting to find proof that's alive and suffering also because we are under a bomb attack.

UNIDENTIFIED MALE: Maybe if you will hit them more, they will be more willing to negotiate. We are not expert. We are just a family.

GOLDWASSER: Israelis are more defiant than ever before, most supporting the government's actions against Hamas and Hezbollah.

DANIEL BENJAMIN, MIDDLE EAST EXPERT: Israel is unified as it has not been in a long time on this. There seems to be a very solid backing for the Olmert government and at this point, a real sense that this has to be done.

COOPER: Ron Kierman pays homage to the daughter he lost years ago. He still dreams of a life with no war, no terror, but with missiles continuing to fall, he's not hopeful.

UNIDENTIFIED MALE: It's not my first war, and frankly, to say I don't think it will be my last war. I want to live a normal life. I don't care if Israel has another meter in southern Lebanon or if Israel has another meter of Gaza. All we want to do is live here in peace, let us be.

COOPER: Just ahead -- tracking terror. How Israel hunts down its enemies.

(COMMERCIAL BREAK)

COOPER: This is how Israel is fighting Hezbollah, with air strikes and cannon fire and small numbers of ground troops.

COOPER: But Israel also hunts its enemies like this. Under cover of darkness, up close, and personal. The targets? Terrorist cells. Its leaders and suicide bombers.

BRIG. GEN DAVID GRANGE, (RET), CNN MILITARY ANALYST: Suicide bombing is en vogue now. It's cheap propaganda, and has tremendous impact and even the person that's the suicide bomber gets killed before they get to the target, just letting them blow up themselves, they're successful.

COOPER: Carnage wrought by suicide bombers has forced Israel to take extreme steps to protect itself, steps long endorsed by Israel's prime minister.

EHUD OLMERT, ISRAELI PRIME MINISTER: Is there any question about the legitimacy of killing someone who is described as a roaming bomb, that is someone on his way to commit a terrorist action, go out, reach out for him and kill him.

COOPER: And that's what Israel does. The tactic is known as targeted assassination, when an arrest is deemed too dangerous, terrorists are hunted down and killed without a trial. Hamas's chief bomb maker, Yayeh Ayash (ph), alias, "the Engineer" was targeted for assassination.

YOSSI MELMAN, TERRORISM EXPERT: We found someone who was close to him who provided his cellular phone, but the battery inside the cellular phone was replaced, and the battery had some explosives, and when Isi Ayash (ph), "the Engineer" received the telephone call the battery exploded and he was killed.

COOPER: While the policy of targeted assassination has long focused primarily on Hamas, and other Palestinian terrorists, Hezbollah's rocket attacks and kidnappings have almost certainly put its leaders in the cross-hairs now as well, including Hezbollah's top man, Sheikh Hassan Nasrallah. UNIDENTIFIED MALE: After the plan to attack on the Israeli patrol, Nasrallah crossed all the red lines and we decided not to allow him immunity anymore.

COOPER: But what if Israel does kill Nasrallah? Targeted assassinations are controversial, even at home. In the West, it's shunned publicly, and in the Arab world, condemned.

UNIDENTIFIED MALE: If Hassan Nasrallah were to be killed by the hunter killer team in the Arab world, in the Muslim world it would be called terrorist.

COOPER: Of course targeted assassinations and military force aren't the only tactics in Israel's arsenal. YAALON: The first capabilities you should enjoy is what they call intelligence dominance. You should be able to find out, to identify the terrorist in the corner, in the cafe, in the car.

COOPER: Human intelligence is perhaps Israel's key weapon against the likes of Hamas and Hezbollah and developing such assets, recruiting operatives and collaborators can be an art form.

UNIDENTIFIED MALE: We try to recruit them. It's not easy because for you, it is recruitment. For them, it means betrayal.

COOPER: For all its human intelligence, communications and military might, Israel, like America, has been, at times, frustrated in its fight against terror. Frustrated by the likes of this man, Emad Mugniyah, a suspected Hezbollah mastermind and one of the most wanted terrorists in the world.

GARY BERNTSEN, FORMER CIA OFFICER: He's primarily responsible for killing marines in 1983, 241 marines died, he has conducted many attacks on the United States and foreign governments.

UNIDENTIFIED MALE: He's the one that is responsible for the blow up of our embassy in Buenos Aires and it looks as if he is the one responsible also for the last terrorist attack that killed eight Israeli troops.

COOPER: But the United States and Israel have hunted Mugniyah for decades. Israel has come close.

UNIDENTIFIED MALE: They shadowed the brother and they planted a bomb in the garage and he was late and the bomb exploded and the brother was killed.

COOPER: And so it goes. For all of Israel's human intelligence and military might, there is one undeniable reality when it comes to fighting terror.

GRANGE: Any kind of guerilla organization, of course, uses people to their advantage, their tactics is to blend in the population, strike when they can.

COOPER: Thanks for watching CNN PRESENTS: "Inside Hezbollah." For the latest on the crisis in the Middle East, stay tuned to CNN. I'm Anderson Cooper in Beirut.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

KEILAR: Next on CNN LIVE SATURDAY, Secretary of State Condoleezza Rice back in the Middle East, trying to end hostilities. And Hezbollah's leader vows to fire more rockets in to Israel if the Israeli offensive doesn't stop now. And in Seattle a muslim charged with murder and attempted murder for a shooting at a Jewish center and we'll have a report on that.

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